Will Marshall: Let’s Turn Back the Clock

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I was developing some concern that some recent conversations I’d been a part of were based around a straw man—the guy who just wanted to turn back the clock ten years to before the bubbles and for some reason hope for a better results. But no. Will Marshall definitely thinks this:

In short, Obama and Geithner are working to restore the financial sector as it existed roughly a decade ago, before the frenzied run-up in real estate prices and the bubble in securitized loans. But as the president has said, the regulatory minimalism of the Bush years must be replaced with a new regime that extends oversight to hedge funds and derivatives and ensures that we never again face the necessity of bailing out companies that are too big or too interlaced to fail.

The administration’s critics envision a more fundamental restructuring: a dramatic shrinking of the financial-services sector; an end to easy credit; a tight corset around any lending practices that might smack of seduction or predation; the permanent intrusion of government into matters of firm strategy and compensation; and, somewhat ironically, a return to the old, black-and-white days when conservative bankers took modest risks for modest profits.

I’m glad that someone is willing to explicitly defend this position, because it might make a straightforward dialogue about it easier. From where I sit, ten years ago it was March of 1999 and the dot-com madness was building. The NASDAQ was rising, but it had not yet made its real ascent:


But soon thereafter, it went into hyperdrive bubble mode (note that the graph above is in logarithmic scale) before eventually crashing hard. And then out of the crash came the housing bubble, and now the current crash. Under the circumstances, I wonder what good is supposed to come of turning the clock back 10 years? It seems like if we somehow just manage to rewind things, that we’ll just replay the same story of bubble and bust. I think Bill Clinton was a dramatically better president than George W. Bush, but it’s simply not possible to claim that the bubble-based nature of the economy was caused by Bush-era regulatory measures—the first go-round of bubble-led growth clearly got under way when Clinton was president.

I think the most compelling argument against the “restructure” camp is that you actually can’t put humpty-dumpty back together again so there’s no point in worrying about it. A big event like this changes investor psychology and the structure of the economy enough that even absent a deliberate effort at restructuring you come out of the crisis looking different than you went in.